A small house or unit can give you more security in retirement. Photo / Getty Images
Q: Due to the idiocy of youth, when I emigrated to New Zealand from Britain in 1985, aged 29, I never gave any thought to retirement, or even buying property. I have always lived in rental accommodation. However, three years ago, I realised I am perhaps only 10 to 12 years away from retirement and joined KiwiSaver, electing to join at 8 per cent almost from the start.
My latest statement indicates I have $35,000 in a low-risk fund. Given my circumstances, should I change my contributions and move into a high-risk fund in the hope of increased growth, or just sit tight on what I am currently doing? I earn between $80,000 and $90,000, and it would be possible for me to save another $35,000 in two years.
However, even if I managed that and withdrew my KiwiSaver to help with a house deposit, I'm not sure if my age in two years' time (60) would make me a candidate for a mortgage. I am single and would be happy with a smallish house.
It seems to me that my only option is to keep contributing 8 per cent to KiwiSaver every year and hope that when I retire, the return from KiwiSaver - added to my state pension - will keep me above the poverty line?
Am I missing something important that I could be doing now? I feel pretty paralysed with indecision.
A: C.S. Lewis once said, "You are never too old to set another goal or to dream a new dream." And somewhat to my surprise, it seems that you're not too old to get a mortgage and a first home at 60ish.
We're not talking a mansion. But you could buy a small house or unit in two years. And it will give you more security - financially and emotionally - in retirement.
Your deposit could include all the money you and your employer have contributed to KiwiSaver, but not the Government's $1000 kick-start and tax credits. They'll stay in your account until you reach 65, at which point it would be good to put that money into extra mortgage payments.
In the meantime, it's probably best if you put as much as you can into KiwiSaver. Normally I suggest people contribute just 3 per cent of their pay and put further savings elsewhere, to maintain access to that money. But you'll be spending it on your home shortly anyway. And piling all your savings into KiwiSaver will prevent any temptation to spend on other things.
You won't be able to have more than 8 per cent deducted from your pay, but you can contribute the rest directly to your provider.
Let's say conservatively that you'll have a $60,000 deposit in two years. With that, you could apply for a $240,000 mortgage to buy a $300,000 home. Mortgage adviser Karen Mooney from Lifetime Mortgage Solutions says that on your pay, and assuming you have no debt, some lenders would give you a loan despite your age.
Here's how it might work. At first you would get a 10-year loan. At 6.5 per cent, you would pay $2725 a month. Or at 8 per cent - to allow for rising interest rates - you would pay $2911 a month.
Five years later, at age 65, the balance would be down to about $139,300 at 6.5 per cent, or $143,600 at 8 per cent. To keep this simple, let's say $142,000.
If you retired at that point, the loan could be repackaged. Mooney suggests two possible options:
• You switch to a 30-year loan. You might well die before it's paid off, but your heirs could sell the house and pay off the loan. At 6.5 per cent interest, you would pay $898 a month, and at 8 per cent, it would be $1042 a month.
• You might be able to get an interest-only loan. That means you would definitely die with the mortgage. But payments would be less in the meantime. At 6.5 per cent you'd pay $769 a month, and at 8 per cent you'd pay $947 a month.
Obviously, if you retire older than 65 and continue paying off the first 10-year loan for longer, that will reduce the payments you make in retirement.
While it's not ideal to be making any mortgage payments after you retire, the payments might well be less than rent. And you wouldn't have a landlord telling you what you can't do, raising your rent and perhaps kicking you out. You would also have an asset to leave to someone, or a charity.
One more thing: no, it wouldn't be a good idea to move to a higher-risk KiwiSaver account. Given that you're planning to withdraw most of the money in about two years, there's too big a chance that your balance in a riskier account would be down.
36-year-old property virgin
Q: When is it too late to get into your first property?
I'm 36 years old, single with no dependants and have about $100,000 in savings (half bank, half managed funds), an income of about $110,000 a year and no debt.
Eventually I'd like to own my own home, but don't want to be tied down with a mortgage at the moment. I also believe that the larger the deposit I can put together, the more beneficial it will be when I do come to buy.
What I'm worried about, however, is whether my ability to get a mortgage will become more difficult the older I get.
I feel enormous pressure to get into buying a property, with all my friends saying they can't believe I've left it so late - almost suggesting I'm doing myself a huge disservice by not buying something. "Prices will just keep going up," they all say, or "Rent is dead money." But isn't interest also dead money?
A: You've got decades to go before your age is likely to stop you getting a mortgage - as outlined in the previous Q&A. And if you maintain your strong financial position, I'm sure banks will be happy to lend to you.
You sound like a classic example of the younger person who isn't keen on home ownership. There's nothing wrong with that, as long as you plan to retire with large enough savings to either buy a house then or cover rent for the rest of your life.
You've made a good start, but I suggest you set your sights high, with savings of at least half a million dollars at retirement - if you still don't own a home at that stage. Don't get tempted along the way to blow half your savings.
Is mortgage interest dead money? Perhaps, but there's another way to look at it. Principal repayments are just paying back the loan. Interest is the price we pay to be in the housing market, with the security and possible capital gains that brings.
However, those gains might not be as big as you make on your savings. Whether buying a home or saving elsewhere is financially better is anyone's guess. It depends on trends in house prices, returns on savings, mortgage rates, insurance, rates, rent and so on. All of that's unpredictable. I presume when you say you don't want to be tied down with a mortgage that you want to feel free to move easily, and perhaps to live overseas. If you're prepared to put up with the uncertainties of renting - and to be a disciplined saver - go for it. It can definitely be a more carefree way of life. As someone once said, "Did you have a good weekend, or do you own your own home?"
Taxing problem for cousins
Q: I have read with interest your comments in your last column about the two cousins who are considering a property investment.
Your advice is sound, but does omit one important point.
It is stated that two of them would be buying the property with the intention, at the time of purchase, of reselling at a profit in around eight years. Therefore, they would under current tax law be fully liable for tax on any profit they make at the time they sell.
This may also be a factor in them (or others in the same situation) making their decision.
A: An excellent point. Thanks.
Realty reality in Tokoroa
Q: Your correspondent with the $600,000 house, $70,000 mortgage and $42,000 in KiwiSaver appears to be a person who is "asset rich and cash poor". I think her best bet would be to sell her property and move to the provinces.
Let's say after selling her house she has $500,000 in cash.
She could move here to Tokoroa and buy a three-bedroom 100sq m brick home on a 1100sq m section.
Rates $1679. CV is $140,000 and asking price $160,000. In a quiet street about 1km from State Highway 1.
Close to a small shopping centre that includes a Four Square, takeaway and butcher shop.
While it would mean moving away from friends and maybe family, there are a lot of upsides. She would have about $350,000 cash immediately available and when she turns 65 about another $50,000 from KiwiSaver.
It is very fair to write that if a person were to move here and were prepared to get out and join community organisations where their interests lie, or try new things, they would soon be telling all and sundry it was the best decision they had made in a long while.
Feel free to pass this on to your correspondent.
A: I have, along with the rest of your letter extolling the virtues of Tokoroa - which I'm afraid I haven't got room for in the column.
You're quite right that people can free-up huge amounts by moving out of Auckland in retirement.
And as Auckland house prices get sillier and sillier, I predict more people will do that.
As far as missing friends is concerned, perhaps groups of friends could all go to the same town.
PS: You're not by any chance a Tokoroa real estate agent, are you?
Westpac service adds up
Q: In response to your appeal for banks to calculate different term deposit returns, Westpac has a "best returns" calculator that illustrates different return options for term deposits, term PIEs, cash PIEs and standard savings accounts. Our bankers and customers use this tool to quantify the future value (after-tax) of different rates, return frequencies and compounding/non-compounding options. Users can enter their own rate or select one of Westpac's carded rates. Many of our staff use this calculator when providing information to customers on the best term investment option. Customers are also given a printout of the results if they wish to ruminate on the options.
A: Good on you. The calculator is at www.tinyurl.com/westpaccalc. It's disappointing that you're the only bank to respond. One finance company, General Finance, also said it offers a similar service.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. her website is www.maryholm.com. her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably day phone number. Mary cannot answer all questions, correspond with readers, or give financial advice.
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